24-Jan-2025

Asset Reconstruction Companies-ARCs

Economics

Why in News ? 

The Reserve Bank of India (RBI) has updated the 'Master Direction - RBI (Asset Reconstruction Companies - ARCs) Directions, 2024', aiming to streamline ARC operations, improve transparency, safeguard creditor interests and strengthen due diligence in the settlement process. 

What are ARCs?

  • ARCs are special financial companies that buy bad loans (non-performing assets or NPAs) from banks and try to recover the money themselves. The idea was introduced in 1998 and became law under the SARFAESI Act in 2002. 

How ARCs Work 

  • Asset Reconstruction: ARCs buy NPAs from banks to try and recover the money. 
  • Securitization: ARCs also sell the bad loans by issuing security receipts to certain buyers (like banks or insurance companies). 
  • Security Receipts: When the debt is recovered, ARCs give receipts to the lenders, charge a fee, and share any recovery profits. 

 

Non-Performing Asset (NPA) 

  • An NPA is a loan where the borrower has not made a payment for at least 90 days. In agriculture, it is considered an NPA if no payment is made for two cropping seasons. 

Types of NPAs 

  • Sub-standard Assets: NPAs that are less than 12 months old. 
  • Doubtful Assets: NPAs that are older than 12 months. 
  • Loss Assets: Assets that are almost impossible to recover and need to be written off completely.